How Does Know Your Customer

The know-your-customer principle

Nothing scares companies and individuals more than the thought of their identities being misused on the Internet. The know-your-customer principle was devised to prevent just such a thing from happening. It is typically used to prevent money laundering or other forms of fraud – thereby protecting companies and customers.

In today’s digital world, the ability to prove one’s own identity has never been more important.

How does KYC work?

The know-your-customer principle is based on money laundering legislation introduced in 2008 and is used to check all new customers of credit institutions and to provide preventive measures to protect against money laundering. By confirming the new customer’s identity, a bank can, for example, ensure that the person and their intentions do not involve criminal transactions such as money laundering.

The basic requirements of the KYC process are set out in laws and regulations. The exact KYC requirements (for example, KYC documents) will vary from sector to sector – although financial service providers and banks are generally required to implement the strictest KYC processes. Since the KYC process was digitalised, the KYC check is performed using different methods or technologies (NFC, AI), security features (holograms) and different security checks (biometrics, liveness). It can include the following phases or processes:

Document checking (POI):
The person’s identity document is checked for signs of falsification or other problems.

Facial check / liveness check:
To enable the timely detection of spoofing attacks, a facial check is performed to ensure that customer is actually who they claim to be.

Address check:
Proof of address is requested (POA) so that the address on the ID card can be compared with the proof-of-address document. This type of document can be an electricity or gas bill that must not be more than three months old. Ultimately, the type of document that is accepted for this check will differ depending on the region in which the process is performed.

How is the POI used?

POI means ‘Proof-Of-Identity’ and is the first step in the know-your-customer process. As mentioned above, this will require an official identity document. Depending on the process, different documents are permitted for this purpose. Passports, for instance, are universally recognised documents that can be used to verify someone’s identity. On the other hand, the use of a driver’s license for this purpose is only accepted in the US, Canada and the Netherlands.

KYC in a changing world

A typical scenario in which you may encounter a KYC check is when you open a bank account on the Internet. A few years ago, this process could take several weeks. More recently, the rapid expansion of computer networks and advances in technology mean that this process can be completed in a matter of minutes – thus providing a secure and convenient alternative to customers who have no desire to walk to the nearest bank branch and would prefer to save time instead. The key factor behind the rapid verification of one’s identity is video identification – a technology that allows companies and companies to initiate the process whenever they wish. Yet we shouldn’t forget that the luxury of this incredible speed tends to be reserved for private individuals. Companies wishing to open a business account can expect to wait longer. This is because they are required to submit more detailed information, for example, about their legal structure, activity and industry, the number of employees, details of their ownership structures, the company structure and its turnover and, if applicable, details about customer relationships.